Agricultural investing for long-term investors

July 18, 2018 2:25 PM

With a global population of seven billion, which is expected to grow to nine billion by 2035, the United Nations expects demand for food to grow 70% by the year 2050. In addition to population growth, the rise of the middle classes in Asia are changing diets, with greater demand for more high protein foods such as beef, lamb, fish and dairy products. Further adding to food supply issues, land in many emerging countries is being converted from growing crops into other uses such as housing.

For long term investors, the potential for an agricultural resources boom means investors are looking for opportunities to invest in agriculture assets in Australia and overseas. Investment projects include investment in livestock (i.e. ownership of sheep and cattle for fattening and on-sale), grain and rice production, aquaculture, dairy herd and poultry investments, land remediation, orchards and cotton production as well as water rights. Investments can include freehold or leasehold ownership of farming land, ownership of agricultural inventory (i.e. crops, herds etc.) or a combination of both. Investments can be pooled into a trust or company or involve separate fractional ownership of farming land and crops. These agricultural investments tend to be more focused on food production with shorter investment time horizons than the longer term forestry, almond and wine investment schemes of the past, which were often based around tax-deferral benefits.

With many farmers being capital constrained due to tighter lending conditions, bringing in third-party investors to fund land and livestock purchases or seasonal capital requirements can represent an attractive partnership opportunity between farmers and investors. For farmers it can be a less risky proposition than incurring debt from a bank, particularly as weather conditions and fluctuating commodity prices can mean that farm incomes can vary significantly from year to year.

The introduction of professional investors, investment managers and fresh capital can also benefit farm productivity as these professional managers are able to bring new farming techniques and technologies to the farm owners to improve yields and lower production costs. For example, farms that are capital constrained may not be able to afford the latest crop planting and seeding machinery which uses GPS guidance and mapping systems to plant rows of crops closer together to increase crop yield and reduce planting costs.

Some of Australia’s largest superannuation funds have invested in agriculture and one of the attractions to institutional investors is that exposure to agricultural commodities helps provide a hedge against inflation, in addition to the potential for attractive long term returns that come from agricultural production and land ownership. As the yields from agricultural land improve with the use of technologies such as genetically-modified crops, drones and robots and better fertilisers, the agricultural land prices rise in value generating capital gains for land owners.

Investing in agriculture is not without its risks and it’s been described as akin to running a factory without a roof – subject to weather patterns including droughts, floods, frosts and plagues as well as fluctuations in prices of both outputs (i.e. produce prices) and farm inputs such as diesel fuel, fertiliser and pesticides, stockfeed and irrigation costs.

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